Explanatory Memorandum to COM(2020)593 - Markets in Crypto-assets - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)593 - Markets in Crypto-assets. |
|---|---|
| source | COM(2020)593  |
| date | 24-09-2020 |
1. CONTEXTOFTHE PROPOSAL
• Reasons for and objectives of the proposal
This proposal is part of the Digital Finance package, a package of measures to further enable and support the potential of digital finance in terms of innovation and competition while mitigating the risks. It is in line with the Commission priorities to make Europe fit for the digital age and to build a future-ready economy that works for the people. The digital finance package includes a new Strategy on digital finance for the EU financial1 sector with the aim to ensure that the EU embraces the digital revolution and drives it with innovative European firms in the lead, making the benefits of digital finance available to European consumers and businesses. In addition to this proposal, the package also includes a proposal for a pilot regime on distributed ledger technology (DLT) market infrastructures2, a proposal for digital operational resilience3, and a proposal to clarify or amend certain related EU financial services rules4.
One of the strategy’s identified priority areas is ensuring that the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies. This proposal, together with the proposal on a DLT pilot regime, represents the first concrete action within this area.
Crypto-assets are one of the major applications of blockchain technology in finance. Since the publication of the Commission’s Fintech Action plan5, in March 2018, the Commission has been examining the opportunities and challenges raised by crypto-assets. Following a big surge in the market capitalisation of crypto-assets during 2017, in December 2017, Executive Vice-President Dombrovskis, in a letter addressed to the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), urged them to reiterate their warnings to investors. In the 2018 FinTech Action plan, the Commission mandated the EBA and ESMA to assess the applicability and suitability of the existing EU financial services regulatory framework to crypto-assets. The advice6, issued in January 2019, argued that while some crypto-assets could fall within the scope of EU legislation, effectively applying it to these assets is not always straightforward. Moreover, the advice noted that provisions in existing EU legislation may inhibit the use of DLT. At the same time, the EBA and ESMA underlined that – beyond EU legislation aimed at combating money laundering and terrorism financing – most crypto-assets fall outside the scope of EU financial services legislation and therefore are not subject to provisions on consumer and investor protection and market integrity, among others, although they give rise to these risks. In addition, a number of
Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on a Digital Finance Strategy for the EU, 23 September 2020, COM(2020)591.
Proposal for a Regulation of the European Parliament and of the Council on a Pilot Regime for market infrastructures based on distributed ledger technology - COM(2020)594.
Proposal for a Regulation of the European Parliament and of the Council on digital operational resilience for the financial sector and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU) No 600/2014 and (EU) No 909/2014 - COM(2020)595.
Proposal for a Directive of the European Parliament and of The Council amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, (EU) 2015/2366 and EU/2016/2341 - COM(2020)596.
European Commission, FinTech Action plan, COM/2018/109 final.
ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, 2019; EBA report with advice on crypto-assets, 2019.
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Member States have recently legislated on issues related to crypto-assets leading to market fragmentation.
A relatively new subset of crypto-assets – the so-called ‘stablecoins’ – has recently emerged and attracted the attention of both the public and regulators around the world. While the crypto-asset market remains modest in size and does not currently pose a threat to financial stability7, this may change with the advent of ‘global stablecoins’, which seek wider adoption by incorporating features aimed at stabilising their value and by exploiting the network effects stemming from the firms promoting these assets8.
Given these developments and as part of the Commission’s broader digital agenda, President Ursula von der Leyen has stressed the need for “a common approach with Member States on cryptocurrencies to ensure we understand how to make the most of the opportunities they create and address the new risks they may pose”9. While acknowledging the risks they may present, the Commission and the Council also jointly declared in December 2019 that they “are committed to put in place a framework that will harness the potential opportunities that some crypto-assets may offer”10. More recently, the European Parliament is working on a report on digital finance, which has a particular focus on crypto assets.11
To respond to all of these issues and create an EU framework that both enables markets in crypto-assets as well as the tokenisation of traditional financial assets and wider use of DLT in financial services, this Regulation will be accompanied by other legislative proposals: the Commission is also proposing a clarification that the existing definition of ‘financial instruments’ - which defines the scope of the Markets in Financial Instruments Directive (MiFID II)12 - includes financial instruments based on DLT,13 as well as a pilot regime on DLT market infrastructures for these instruments14. The pilot regime will allow for experimentation within a safe environment and provide evidence for possible further amendments.
This proposal, which covers crypto-assets falling outside existing EU financial services legislation, as well as e-money tokens, has four general and related objectives. The first objective is one of legal certainty. For crypto-asset markets to develop within the EU, there is a need for a sound legal framework, clearly defining the regulatory treatment of all crypto-assets that are not covered by existing financial services legislation. The second objective is to support innovation. To promote the development of crypto-assets and the wider use of DLT, it is necessary to put in place a safe and proportionate framework to support innovation and fair competition. The third objective is to instil appropriate levels of consumer and investor protection and market integrity given that crypto-assets not covered by existing financial services legislation present many of the same risks as more familiar financial instruments. The
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FSB Chair’s letter to G20 Finance Ministers and Central Bank Governors, 2018.
G7 Working Group on Stablecoins, Report on ‘Investigating the impact of global stablecoins’, 2019.
Mission letter of President-elect Von der Leyen to Vice-President Dombrovskis, 10 September 2019.
Joint Statement of the European Commission and Council on ‘stablecoins’, 5 December 2019.
“Report with recommendations to the Commission on Digital Finance: emerging risks in crypto-assets -
regulatory and supervisory challenges in the area of financial services, institutions and markets”
(2020/2034(INL)
https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2020/2034(INL)&l=en.
financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU
Proposal for a Directive of the European Parliament and of the Council amending Directives
EU/2016/2341 - COM(2020)596
Proposal for a Regulation of the European Parliament and of the Council on a Pilot Regime for market
infrastructures based on distributed ledger technology - COM(2020)594
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fourth objective is to ensure financial stability. Crypto-assets are continuously evolving. While some have a quite limited scope and use, others, such as the emerging category of ‘stablecoins’, have the potential to become widely accepted and potentially systemic. This proposal includes safeguards to address potential risks to financial stability and orderly monetary policy that could arise from ‘stablecoins’.
• Consistency with existing policy provisions in the policy area
This proposal is part of a broader framework on crypto-assets and distributed ledger technology (DLT), as it is accompanied by proposals ensuring that existing legislation does not present obstacles to the uptake of new technologies while still reaching the relevant regulatory objectives.
The proposal builds on extensive and long-standing market monitoring and participation in international policy work, for example, in such fora as the Financial Stability Board, the Financial Action Task Force and the G7.
As part of the FinTech Action plan adopted in March 201815, the Commission mandated the European Supervisory Authorities (ESAs) to produce advice on the applicability and suitability of the existing EU financial services regulatory framework on crypto-assets. This proposal builds on the advice received from the EBA and ESMA.16
• Consistency with other Union policies
As stated by President von der Leyen in her Political Guidelines,17 and set out in the Communication ‘Shaping Europe’s digital future’,18 it is crucial for Europe to reap all the benefits of the digital age and to strengthen its industrial and innovation capacity within safe and ethical boundaries. In addition, the mission letter provided to Executive Vice-President Dombrovskis calls for a common approach with Member States on cryptocurrencies to ensure Europe can make the most of the opportunities they create and address the new risks they may
pose.19
This proposal is closely linked with wider Commission policies on blockchain technology, since crypto-assets, as the main application of blockchain technologies, are inextricably linked to the promotion of blockchain technology throughout Europe. This proposal supports a holistic approach to blockchain and DLT, which aims at positioning Europe at the forefront of blockchain innovation and uptake. Policy work in this area has included the creation of the European Blockchain Observatory and Forum, and the European Blockchain Partnership, which unites all Member States at political level, as well as the public-private partnerships envisaged with the International Association for Trusted Blockchain Applications.20
This proposal is also consistent with the Union policies aimed at creating a Capital Markets Union (CMU). It notably responds to the High-level Forum’s final report, which stressed the underused potential of crypto-assets and called on the Commission to bring legal certainty and
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Region on a FinTech Action plan, COM(2018)109, 08.03.2018
ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, 2019; EBA report with advice on crypto-assets, 2019.
https://ec.europa.eu/commission/sites/beta-political/files/political-guidelines-next-commission_en.pdf Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Region, Shaping Europe’s Digital Future, COM(2020)67, 19.02.2020
Mission letter of President-elect Von der Leyen to Vice-President Dombrovskis, 10 September 2019. https://ec.europa.eu/digital-single-market/en/blockchain-technologies
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establish clear rules for the use of crypto-assets.21 This proposal is consistent with the SME strategy adopted on 10 March 2020, which also highlights DLT and crypto-assets as innovations that can enable SMEs to engage directly with investors.22
Finally, the proposal is fully in line with the recommendation in the Security Union Strategy for the development of a legislative framework in crypto-assets given the growing effect of these new technologies on how financial assets are issued, exchanged, shared and accessed.23
2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY
• Legal basis
The proposal is based on Article 114 TFEU, which confers on the European institutions the competence to lay down appropriate provisions for the approximation of laws of the Member States that have as their objective the establishment and functioning of the internal market. The proposal aims to remove obstacles to establishment and improve the functioning of the internal market for financial services by ensuring that the applicable rules are fully harmonised.
Today, crypto-asset issuers and service providers cannot fully reap the benefits of the internal market, due to a lack of both legal certainty about the regulatory treatment of crypto-assets as well as the absence of a dedicated and coherent regulatory and supervisory regime at EU level. While a few Member States have already implemented a bespoke regime to cover some crypto-asset service providers or parts of their activity, in most Member States they operate outside any regulatory regime. In addition, an increasing number of Member States are considering bespoke national frameworks to cater specifically for crypto-assets and crypto-asset service providers.
The divergent frameworks, rules and interpretations of both crypto-assets and crypto-asset services throughout the Union hinder the service providers’ ability to scale up their activity at EU level. This means that service providers of these inherently cross-border products and services are forced to familiarise themselves with several Member States’ legislations, obtain multiple national authorisations or registrations and comply with often divergent national laws, sometimes adjusting their business model throughout the Union. This results in high costs, legal complexity and uncertainty for service providers operating in the crypto-assets space, limiting the development and scaling up of crypto-asset activities in the Union. Additionally, the lack of applicable regimes to crypto-asset service providers in many Member States limits the availability of funding and sometimes even wider access to necessary financial services, such as banking services, due to the regulatory uncertainty associated with crypto-assets and therefore crypto-asset service providers.
These divergences also create an uneven playing field for crypto-asset service providers depending on their location, creating further barriers to the smooth functioning of the internal market. Finally, this adds to the lack of legal certainty, which, combined with the absence of a common EU framework, leaves consumers and investors exposed to substantial risks.
Recommendation 7 of the High-Level forum on the Capital Markets Union’s final report.
(https://ec.europa.eu/info/sites/info/files/business_economy_euro/growth_and_investment/documents/2
00610-cmu-high-level-forum-final-report_en.pdf).
Communication from the Commission to the European Parliament, the European Council, the Council,
for a sustainable and digital Europe, COM(2020)203, 10.03.2020
Communication from the Commission to the European Parliament, the European Council, the Council,
Union Strategy, COM(2020)605 final of 24.07.2020
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Through the introduction of a common EU framework, uniform conditions of operation for firms within the EU can be set, overcoming the differences in national frameworks, which is leading to market fragmentation and reducing the complexity and costs for firms operating in this space. At the same time, it will offer firms full access to the internal market and provide the legal certainty necessary to promote innovation within the crypto-asset market. Lastly, it will cater for market integrity and provide consumers and investors with appropriate levels of protection and a clear understanding of their rights as well as ensuring financial stability.
• Subsidiarity
The different approaches taken by Member States makes cross-border provision of services in relation to crypto-assets difficult. Proliferation of national approaches also poses risks to level playing field in the single market in terms of consumer and investor protection, market integrity and competition. Furthermore, while some risks are mitigated in the Member States that have introduced bespoke regimes on crypto-assets, consumers, investors and market participants in other Member States remain unprotected against some of the most significant risks posed by crypto-assets (e.g. fraud, cyber-attacks, market manipulation).
Action at EU level, such as this proposal for a Regulation, would create an environment in which a larger cross-border market for crypto-assets and crypto-asset service providers could develop, thereby reaping the full benefits of the internal market. An EU framework would significantly reduce the complexity as well as the financial and administrative burdens for all stakeholders, such as service providers, issuers and consumers and investors. Harmonising operational requirements for service providers as well as the disclosure requirements imposed on issuers could also bring clear benefits in terms of consumer and investor protection and financial stability.
• Proportionality
Under the principle of proportionality, the content and form of EU action should not exceed what is necessary to achieve the objectives of the Treaties. The proposed rules will not go beyond what is necessary in order to achieve the objectives of the proposal. They will cover only the aspects that Member States cannot achieve on their own and where the administrative burden and costs are commensurate with the specific and general objectives to be achieved.
The proposed Regulation will ensure proportionality by design, differentiating clearly between each type of services and activities in accordance with the associated risks, so that the applicable administrative burden is commensurate with the risks involved. Notably, the requirements set out in this regulation are proportionate to the limited associated risks, given the relatively small market size to date. At the same time, the proposal imposes more stringent requirements on ‘stablecoins’, which are more likely to grow quickly in scale and possibly result in higher levels of risk to investors, counterparties and the financial system.
• Choice of the instrument
Article 114 TFEU allows the adoption of acts in the form of a Regulation or Directive. For this proposal, a Regulation was chosen in order to lay down a single set of immediately applicable rules throughout the Single Market.
The proposed Regulation establishes harmonised requirements for issuers that seek to offer their crypto-assets across the Union and crypto-asset service providers wishing to apply for an authorisation to provide their services in the Single Market. These issuers and service providers must not be subject to specific national rules. Therefore, a Regulation is more appropriate than a Directive.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER
Contents
- CONSULTATIONS
- regulatory and supervisory challenges in the area of financial services, institutions and markets”
- Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in
- 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, (EU) 2015/2366 and
- 17 18
- 19 20
- the European Economic and Social Committee and the Committee of the Regions on An SME Strategy
- the European Economic and Social Committee and the Committee of the Regions on the EU Security
- N/A
- i) The Commission carried out a dedicated open public consultation (19 December
- ii) The Commission consulted the public on an inception impact assessment (19
- iii) The Commission services consulted Member State experts in the Expert Group on
- iv) The Commission services held a dedicated webinar on an EU framework for crypto-
- As part of a series of outreach events, the Commission hosted a webinar specifically on crypto-assets. A wide range of industry stakeholders and public authorities participated in the
- significant risks to consumer protection, for example, those raised by wallet providers. In addition, the Electronic Money Directive does not set specific provisions for an entity that
- to this type of cry pto- asset. This approach could potentially be justified, as the risks posed by
- stability, monetary policy and monetary sovereignty) would exceed the benefits offered to EU consumers in terms of fast, cheap, efficient and inclusive means of payment. However, Option
- identified by the Financial Stability Board , in particular financial stability risks. The
ANDIMPACTASSESSMENTS
Ex-post evaluations/fitness
checks of existing legislation
• Stakeholder consultations
The Commission has consulted stakeholders throughout the process of preparing this proposal. In particular:
2019 - 19 March 2020)24
December 2019 - 16 January 2020)25
Banking, Payments and Insurance (EGBPI) on two occasions (18 May 2020 and 16 July 2020)26.
assets, as part of the Digital Finance Outreach 2020 (“DFO”) series of events (19 May 2020)
The purpose of the public consultation was to inform the Commission on the development of a potential EU framework for crypto-assets. It covered both questions on crypto-assets not covered by the existing EU financial services legislation, crypto-assets covered by the existing EU financial services legislation (e.g. qualifying as transferable securities or electronic money/e-money), specific questions on so-called ‘stablecoins’ as well as more general questions on the application of DLT in financial services.
Most respondents stressed that the creation of a bespoke regime for crypto-assets not currently covered by the EU financial services legislation, including non-regulated ‘stablecoins’, would be beneficial for the establishment of a sustainable crypto-asset ecosystem in the EU. The majority of respondents confirmed that there is a need for legal certainty and harmonisation across national legislations, and many stakeholders were in favour of the bulk of the exemplified requirements that could be set for crypto-asset service providers.
Member State representatives in the EGBPI expressed overall support for the approach chosen, to create an appropriate bespoke regulatory framework for unregulated crypto-assets. They highlighted the need to avoid regulatory arbitrage, avoid circumvention of rules by crypto-asset issuers, and to ensure that all relevant rules from existing legislation on payments and e-money is also present in a bespoke regime for the so-called ‘stablecoins’. The need to provide a redemption right for ‘stablecoins’ was also mentioned whilst there were differing opinions about the preferred solution in relation to supervision.
As part of a series of outreach events, the Commission hosted a webinar specifically on crypto-assets. A wide range of industry stakeholders and public authorities participated in the
https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/docume nts/2019-crypto-assets-consultation-document_en.pdf
Impact Assessment accompanying the document Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets (MiCA) SWD(2020)380 https://ec.europa.eu/info/publications/egbpi-meetings-2020_en
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webinar, providing additional input from the sector on the interaction with the financial services legisl ati on.
The proposal also builds on and integrates feedback received through meetings with stakeholders and EU authorities. Most stakeholders, including crypto-asset service providers, have been overall supportive, underlining once again that the sector is very much looking for legal certainty in order to develop further.
• Collection and use of expertise
In preparing this proposal, the Commission has relied on qualitative and quantitative evidence collected from recognised sources, including the two reports from the EBA and ESMA. This has been complemented with publicly available reports from supervisory authorities, international standard setting bodies and leading research institutes, as well as quantitative and qualitative input from identified stakeholders across the global financial sector.
• Im pact assessment
This proposal is accompanied by an impact assessment, which was submitted to the Regulatory Scrutiny Board (RSB) on 29 April 2020 and approved on 29 May 2020.27 The RSB recommended improvements in some areas with a view to: (i) put the initiative in the context of ongoing EU and international regulatory efforts; (ii) provide more clarity as to how the initiative will mitigate the risks of fraud, hacking and market abuse and also explain the coherence with the upcoming revision of the anti-money laundering legislation; and (iii)
explain better the financial stability concerns relating to ‘stablecoins’ and clarify how
supervisory bodies will ensure investor and consumer protection. The impact assessment has been amended accordingly, also addressing the more detailed comments made by the RSB.
F irst, the Commission considered two policy options for developing a crypto-asset framework for cry pto-assets not covered by existing EU financial services legislation (except ‘stablecoins’ for which a different set of options was considered - see below):
• Option 1 - ‘Opt-in’ regime for unregulated crypto-assets
Under Option 1, issuers and service providers that opt in to the EU regime would benefit from an EU passport to expand their activities across borders. Service providers, which decide not to opt in, would remain unregulated or would be subject to national bespoke regimes without being granted the EU passport.
• Option 2 - Full harmonisation
Under Option 2, all issuers (except those making small offerings) and service providers would be subject to EU law and would benefit from an EU passport. The national bespoke regimes on cry pto-assets would no longer be applicable.
While Option 1 could be less burdensome for small issuers and service providers that can decide not to opt in, Option 2 would ensure a higher level of legal certainty, investor protection, market integrity and financial stability, and would reduce market fragmentation across the Single Market. Full ha rmonisation represents a more coherent approach compared to an opt-in regime. Therefore, Option 2 was the preferred option.
In addition, the Commission also assessed specific options for the so-called ‘stablecoins’ where these would also be considered cry pto- assets not covered by existing EU financial services legislation:
Impact Assessment accompanying the document Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets (MiCA) SWD(2020)380.
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• Option 1 – bespoke legislative regime aimed at addressing the risks posed by
‘stablecoins’ and ‘global stablecoins’
By following a strict risk-based approach and building on recommendations currently being developed by, for example, the FSB, this option would address vulnerabilities to financial stability posed by stablecoins, while allowing for the development of different types of ‘stablecoin’ business models. These would include specific disclosure requirements for
‘stablecoin’ issuers as well as requirements imposed on the reserve backing the ‘stablecoin’.
• Option 2 - regulating ‘stablecoins’ under the Electronic Money Directive
‘Stablecoins’ whose value is backed by one single currency that is legal tender are close to the definition of e-money under the Electronic Money Directive. The aim of many ‘stablecoins’ is to create a “means of payments” and, when backed by a reserve of assets, some ‘stablecoins’ could become a credible means of exchange and store of value. In that sense, ‘stablecoins’ can
arguably have common features with e-money. However, this option would require ‘stablecoin’ issuers to comply with existing legislation that may not be fit for purpose. Although the Electronic Money Directive and, by extension the Pa y ment Services Directive,
could cover some ‘stablecoin’ service providers, it might not mitigate adequately the most
significant risks to consumer protection, for example, those raised by wallet providers. In addition, the Electronic Money Directive does not set specific provisions for an entity that
would be systemic, which is what ‘global stablecoins’ could potentially become.
• Option 3 - measures aimed at limiting the use of ‘stablecoins’ within the EU’ Option 3 would be to restrict the issuance of ‘stablecoins’ and the provision of services related
to this type of cry pto- asset. This approach could potentially be justified, as the risks posed by
‘stablecoins’ and in particular those that could reach global scale (including risks to financial
stability, monetary policy and monetary sovereignty) would exceed the benefits offered to EU consumers in terms of fast, cheap, efficient and inclusive means of payment. However, Option
3 would not only create costs for ‘stablecoins’ already in operation, but it would also prevent
the reaping of any benefits related to this new type of cry pto - assets. Option 3 would not be consistent with the objectives set at EU level to promote innovation in the financial sector. Furthermore, Option 3 could leave some financial stability risks unaddressed, should EU
consumers widely use ‘stablecoins’ issued in third countries.
The Commission considered that Option 1 was the preferred option for ‘stablecoins’ in
combination with Option 2, to avoid regulatory arbitrage between ‘stablecoins’ that are
indistinguishable from e-money and the treatment of e-money issued on a distributed ledger. Together with Option 2 (full ha rmonisation as described above) for other types of crypto-assets not covered by existing EU financial services legislation, these would create a
comprehensive and holistic EU framework on ‘stablecoins’, capable of mitigating the risks
structure of ‘stablecoins’ is complex and comprises many interdependent functions and legal
entities. The regulatory approach under Option 1 (in combination with Option 2 for hitherto
unregulated crypto-assets) would cover the different functions usually present in ‘stablecoin’
structures (governance body, asset management, payment and c ustom er i nterfa ce functions) and would also capture those interactions between entities that can amplify the risk to financial sta bil ity .
Financial Stability Board, ‘Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements’.
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• Regulatory fitness and simplification
This Regulation imposes an obligation on issuers of crypto-assets to publish an information document (called white paper) with mandatory disclosure requirements. In order to avoid the creation of administrative burden, small and medium-sized enterprises (SMEs) will be exempted from the publication of such an information document where the total consideration of the offering of crypto-assets is less than €1,000,000 over a period of 12 months. Issuers of ‘stablecoins’ will not be subject to authorisation by a national competent authority (NCA) if the outstanding amount of ’stablecoins’ is below €5,000,000. Furthermore, the requirements imposed on crypto-asset service providers are proportionate to the risks created by the services provided.
• Fundamental rights
The EU is committed to high standards of protection of fundamental rights and is signatory to a broad set of conventions on human rights. In this context, the proposal is not likely to have a direct impact on these rights, as listed in the main UN conventions on human rights, the Charter of Fundamental Rights of the European Union, which is an integral part of the EU Treaties, and the European Convention on Human Rights (ECHR).
4. BUDGETARYIMPLICATIONS
This proposal holds implications in terms of costs and administrative burden for NCAs, the EBA and ESMA. The magnitude and distribution of these costs will depend on the precise requirements placed on crypto-asset issuers and service providers and the related supervisory and monitoring tasks.
The estimated supervisory costs for each Member State (including staff, training, IT infrastructure and dedicated investigative tools) can range from €350.000 to €500.000 per year, with one-off costs estimated at €140.000. However, this would be partially offset by the supervisory fees that NCAs would levy on crypto-asset service providers and issuers.
For the EBA, it will require over time a total of 18 full-time employees (FTE) to take on the supervision of issuers of significant asset-referenced tokens or e-money tokens. The EBA will also incur additional IT costs, mission expenses for the on-site inspections and translation costs. However, all of these costs would be fully covered by the fees levied on the issuers of significant asset-referenced tokens and issuers of significant e-money tokens.
For ESMA, the estimated costs of establishing a register of all crypto-asset service providers and maintaining this with the information received from NCAs and the EBA is to be covered within their operating budget.
The financial and budgetary impacts of this proposal are explained in detail in the legislative financial statement annexed to this proposal.
5. OTHERELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
Providing for a robust monitoring and evaluation mechanism is crucial to ensure that the regulatory actions undertaken are effective in achieving their respective objectives. The Commission has therefore established a programme for monitoring the outputs and impacts of this Regulation. The Commission will be in charge of monitoring the effects of the preferred policy options on the basis of the non-exhaustive list of indicators indicated in the impact assessment (p.64-65). The Commission will also be in charge of assessing the impact of this
Regulation and will be tasked with preparing a report to the Council and Parliament (Article 122 of the proposal).
• Detailed explanation of the specific provisions of the proposal
This proposal seeks to provide legal certainty for crypto-assets not covered by existing EU financial services legislation and establish uniform rules for crypto-asset service providers and issuers at EU level. The proposed Regulation will replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation and also establish specific rules for so-called ‘stablecoins’, including when these are e-money. The proposed Regulation is divided into nine Titles.
Title I sets the subject matter, the scope and the definitions. Article 1 sets out that the Regulation applies to crypto-asset service providers and issuers, and establishes uniform requirements for transparency and disclosure in relation to issuance, operation, organisation and governance of crypto-asset service providers, as well as establishes consumer protection rules and measures to prevent market abuse. Article 2 limits the scope of the Regulation to crypto-assets that do not qualify as financial instruments, deposits or structured deposits under EU financial services legislation. Article 3 sets out the terms and definitions that are used for the purposes of this Regulation, including ‘crypto-asset’, ‘issuer of crypto-assets’, ‘asset-referenced token’ (often described as ‘stablecoin’), ‘e-money token’ (often described as ‘stablecoin’), ‘crypto-asset service provider’, ‘utility token’ and others. Article 3 also defines the various crypto-asset services. Importantly, the Commission may adopt delegated acts to specify some technical elements of the definitions, to adjust them to market and technological developments.
Title II regulates the offerings and marketing to the public of crypto-assets other than asset-referenced tokens and e-money tokens. It indicates that an issuer shall be entitled to offer such crypto-assets to the public in the Union or seek an admission to trading on a trading platform for such crypto-assets if it complies with the requirements of Article 4, such as the obligation to be established in the form of a legal person or the obligation to draw up a crypto-asset white paper in accordance with Article 5 (with Annex I) and the notification of such a crypto-asset white paper to the competent authorities (Article 7) and its publication (Article 8). Once a whitepaper has been published, the issuer of crypto-assets can offer its crypto-assets in the EU or seeks an admission of such crypto-assets to trading on a trading platform (Article 10). Article 4 also includes some exemptions from the publication of a whitepaper, including for small offerings of crypto-assets (below €1 million within a twelve-month period) and offerings targeting qualified investors as defined by the Prospectus Regulation (Regulation EU 2017/1129). Article 5 and Annex I of the proposal set out the information requirements regarding the crypto-asset white paper accompanying an offer to the public of crypto-assets or an admission of crypto-assets to a trading platform for crypto-assets, while Article 6 imposes some requirements related to the marketing materials produced by the issuers of crypto-assets, other than asset-referenced tokens or e-money tokens. The crypto-asset white paper will not be subject to a pre-approval process by the national competent authorities (Article 7). It will be notified to the national competent authorities with an assessment whether the crypto-asset at stake constitutes a financial instrument under the Markets in Financial Instruments Directive (Directive 2014/65/EU), in particular. After the notification of the crypto-asset white paper, competent authorities will have the power to suspend or prohibit the offering, require the inclusion of additional information in the crypto-asset white paper or make public the fact that the issuer is not complying with the Regulation (Article 7). Title II also includes specific provisions on the offers of crypto-assets that are limited in time (Article 9), the amendments of an initial crypto-asset white paper (Article 11), the right of withdrawal
granted to acquirers of crypto-assets (Article 12), the obligations imposed on all issuers of crypto-assets (Article 13) and on the issuers’ liability attached to the crypto-asset white paper (Article 14).
Title III, Chapter 1 describes the procedure for authorisation of asset-referenced token issuers and the approval of their crypto-asset white paper by national competent authorities (Articles 16 to 19 and Annexes I and II). To be authorised to operate in the Union, issuers of asset-referenced tokens shall be incorporated in the form of a legal entity established in the EU (Article 15). Article 15 also indicates that no asset-referenced tokens can be offered to the public in the Union or admitted to trading on a trading platform for crypto-assets if the issuer is not authorised in the Union and it does not publish a crypto-asset white paper approved by its competent authority. Article 15 also includes exemptions for small-scale asset-referenced tokens and for asset-referenced tokens that are marketed, distributed and exclusively held by qualified investors. Withdrawal of an authorisation is detailed in Article 20 and Article 21 sets out the procedure for modifying the crypto-asset white paper.
Title III, Chapter 2 sets out the obligations for issuers of asset-referenced tokens. It states they shall act honestly, fairly and professionally (Article 23). It lays down the rules for the publication of the crypto-asset white paper and potential marketing communications (Article 24) and the requirements for these communications (Article 25). Further, issuers are subject to ongoing information obligations (Article 26) and they are required to establish a complaint handling procedure (Article 27).
They shall also comply with other requirements, such as rules on conflicts of interest (Article 28), notification on changes to their management body to its competent authority (Article 29), governance arrangements (Article 30), own funds (Article 31), rules on the reserve of assets backing the asset-referenced tokens (Article 32) and requirements for the custody of the reserve assets (Article 33). Article 34 explains that an issuer shall only invest the reserve assets in assets that are secure, low risk assets. Article 35 also imposes on issuers of asset-referenced tokens the disclosure of the rights attached to the asset-referenced tokens, including any direct claim on the issuer or on the reserve of assets. Where the issuer of asset-referenced tokens does not offer direct redemption rights or claims on the issuer or on the reserve assets to all holders of asset-reference tokens, Article 35 provides holders of asset-referenced tokens with minimum rights. Article 36 prevents issuers of asset-referenced tokens and crypto-asset service providers from granting any interest to holders of asset-referenced tokens.
Title III, Chapter 4, sets out the rules for the acquisition of issuers of asset-referenced tokens, with Article 37 detailing the assessment of an intended acquisition, and Article 38 the content of such an assessment.
Title III, Chapter 5, Article 39 sets out the criteria that EBA shall use when determining whether an asset-referenced token is significant. These criteria are: the size of the customer base of the promoters of the asset-referenced tokens, the value of the asset-referenced tokens or their market capitalisation, the number and value of transactions, size of the reserve of assets, significance of the issuers’ cross-border activities and the interconnectedness with the financial system. Article 39 also includes an empowerment for the Commission to adopt a delegated act in order to specify further the circumstances under which and thresholds above which an issuer of asset-referenced tokens will be considered significant. Article 39 includes some minimum thresholds that the delegated act shall in any case respect. Article 40 details the possibility for an issuer of an asset-referenced token to classify as significant at the time of applying for an authorisation on their own initiative. Article 41 lists the additional obligations
applicable to issuers of significant asset-referenced tokens, such as additional own funds requirements, liquidity management policy and interoperability.
Tittle III, Chapter 6, Article 42 obliges the issuer to have a procedure in place for an orderly wind-down of their activities.
Title IV, Chapter 1 describes the procedure for authorisation as an issuer of e-money tokens. Article 43 describes that no e-money tokens shall be offered to the public in the Union or admitted to trading on a crypto-asset trading platform unless the issuer is authorised as a credit institution or as an ‘electronic money institution’ within the meaning of Article 2(1) of Directive 2009/110/EC. Article 43 also states that ‘e-money tokens’ are deemed electronic money for the purpose of Directive 2009/110/EC.
Article 44 describes how holders of e-money tokens shall be provided with a claim on the issuer: e-money tokens shall be issued at par value and on the receipt of funds, and upon request by the holder of e-money tokens, the issuers must redeem them at any moment and at par value. Article 45 prevents issuers of e-money tokens and crypto-asset service providers from granting any interest to holders of e-money tokens. Article 46 and Annex III sets out the requirements for the crypto-asset white paper accompanying the issuance of e-money tokens, for example: description of the issuer, detailed description of the issuer’s project, indication of whether it concerns an offering of e-money tokens to the public or admission of these to a trading platform, as well as information on the risks relating to the e-money issuer, the e-money tokens and the implementation of any potential project. Article 47 includes provision on the liability attached to such crypto-asset white paper related to e-money tokens. Article 48 sets requirements for potential marketing communications produced in relation to an offer of e-money tokens and Article 49 states that any funds received by an issuer in exchange for e-money tokens, shall be invested in assets denominated in the same currency as the one referenced by the e-money token.
Title IV, Chapter 2, Article 50 states that the EBA shall classify e-money tokens as significant on the basis of the criteria listed in Article 39. Article 51 details the possibility of an issuer of an e-money token to classify as significant at the time of applying for an authorisation on their own initiative. Article 52 contains the additional obligations applicable to issuers of significant e-money tokens. Issuers of significant e-money tokens must apply Article 33 on the custody of the reserve assets and Article 34 on the investment of these assets instead of Article 7 of Directive 2009/110/EC, Article 41, paragraphs 1, 2, and 3 on remuneration, interoperability and liquidity management, Article 41, paragraph 4 instead of Article 5 of Directive 2009/110/EC and Article 42 on an orderly wind-down of their activities.
Title V sets out the provisions on authorisation and operating conditions of crypto-asset service providers. Chapter 1 defines the provisions on authorisation (Article 53), detailing the content of such an application (Article 54), the assessment of the application (Article 55) and the rights granted to competent authorities to withdraw an authorisation (Article 56). The chapter also includes a mandate for ESMA to establish a register of all crypto-asset service providers (Article 57), which will also include information on the crypto-asset white papers notified by competent authorities. For the cross-border provision of crypto-asset services, Article 58 sets out the details and the way information about cross-border activities of crypto-assets should be communicated from the competent authority of the home Member State to that of the host Member State.
Chapter 2 imposes requirements on all crypto-asset service providers, such as the obligation to act honestly, fairly and professionally (Article 59) prudential safeguards (Article 60 and Annex IV), organisational requirements (Article 61), rules on the safekeeping of clients’ crypto-assets and funds (Article 63) the obligation to establish a complaint handling
procedure (Article 64), rules on conflict of interests (Article 65) and rules on outsourcing (66). Title V, Chapter 3 sets out requirements for specific services: custody of crypto-assets (Article 67), trading platforms for crypto-assets (Article 68), exchange of crypto-assets for fiat currency or for other crypto-assets (Article 69), execution of orders (Article 70), placing of crypto-assets (Article 71), reception and transmission of orders on behalf of third parties (Article 72) and advice on crypto-assets (Article 73). Chapter 4 specifies the rules on acquisition of crypto-assets service providers.
Title VI puts in place prohibitions and requirements to prevent market abuse involving crypto-assets. Article 76 defines the scope of market abuse rules. Article 77 defines the notion of inside information and indicates that an issuer whose crypto-assets are admitted to trading on a trading platform for crypto-assets shall disclose inside information. Other provisions of the title ban insider dealing (Article 78), unlawful disclosure of inside information (Article 79) and market manipulation (Article 80).
Title VII provides details on the powers of national competent authorities, the EBA and ESMA. Title VII, Chapter 1 imposes on Member States the obligation to designate one or several competent authorities for the purpose of this regulation, including one competent authority designated as a single point of contact (Article 81). Chapter 1 also sets out detailed provisions on the powers of national competent authorities (Article 82), cooperation between competent authorities (Article 83), with the EBA and ESMA (Article 84) or with other authorities (Article 85). It also details the notification duties of Member States (Article 86), rules on professional secrecy (Article 87), data protection (Article 88) and on precautionary measures that can be taken by national competent authorities of host Member States (Article 89). Article 90 sets out rules on cooperation with third countries and Article 91 specifies complaint handling by competent authorities.
Title VII, Chapter 2 details the administrative sanctions and measures that can be imposed by competent authorities (Article 92), the exercise of their supervisory powers and powers to impose penalties (Article 93), the right of appeal (Article 94), the publication of decisions (Article 95), the reporting of penalties to the EBA and ESMA (Article 96) and the reporting of breaches and protection of persons reporting such breaches (Article 97).
Title VII, Chapter 3 sets out detailed provisions on the EBA's powers and competences related to the supervision of issuers of significant asset-referenced tokens and significant e-money tokens, including supervisory responsibilities (Article 98) and rules on supervisory colleges for issuers of significant asset-referenced tokens are mentioned in Article 99. The college shall consist of, among others, the competent authority of the home Member State where the issuer of the asset-referenced tokens has been authorised, the EBA, ESMA, the competent authorities with supervision of the most relevant crypto-asset trading platforms, custodians, credit institutions etc. providing services in relation to the significant asset-referenced token and the ECB. Where the issuer of significant asset-referenced tokens is established in a Member State the currency of which is not the euro, or where a currency that is not euro is included in the reserve assets, the national central bank of that Member State is part of the college. Competent authorities not belonging to the college may request from the college all information relevant to perform their supervisory duties. Article 99 also describes how the EBA, in cooperation with ESMA and the European System of Central Banks, must develop draft regulatory standards to determine the most relevant trading platforms and custodians and the details of the practical arrangements of the college.
Powers to issue non-binding opinions are conferred to the college in Article 100. These opinions can be related to require an issuer to hold a higher amount of own funds, an amended crypto-asset white paper, envisaged withdrawal of authorisation, envisaged agreement of
exchange of information with a third-country supervisory authority etc. Competent authorities or the EBA shall duly consider the opinions of the college and where they do not agree with the opinion, including any recommendations, their final decision shall contain explanations for any significant deviation from the opinion or recommendations.
Article 101 sets out the rules for supervisory colleges for issuers of significant e-money tokens, which functions in the same way as the colleges for asset-referenced tokens (additional participants include competent authorities of most relevant payment institutions providing payment services in relation to the significant e-money tokens) and Article 102 the powers to issues non-binding opinions of such a college.
Chapter 4 specifies the EBA’s powers and competences on issuers of significant asset-referenced tokens and issuers of significant e-money tokens. Legal privilege (Article 103), request for information (Article 104), general investigative powers (Article 105), on-site inspections (Article 106), exchange of information (Article 107), agreement on exchange of information with third countries (Article 108), disclosure of information from third countries (Article 109) and cooperation with other authorities (Article 110). The obligation of professional secrecy is mentioned in Article 111 and supervisory measures by the EBA, in Article 112. Administrative sanctions and other measures, in particular, fines are detailed in Article 113, with the consequent Articles regulating periodic penalty payments (Article 114), the disclosure, nature and enforcement of fines (Article 115) and the corresponding procedural rules for taking supervisory measures and imposing fines (Article 116). Article 117 and Article 118 set out the requirements on the hearing of persons concerned and the unlimited jurisdiction of the Court of Justice over the EBA's decisions, respectively. In accordance with Article 119, the EBA should be able to charge fees to the issuers of significant asset-referenced tokens and the issuers of significant e-money tokens based on a delegated act adopted pursuant to the Regulation. Article 120 gives powers to the EBA to delegate specific supervisory tasks to competent authorities where necessary for the proper supervision of an issuer of a significant asset-referenced token or an issuer of a significant e-money token.
The exercise of the delegation with a view to adopt Commission's delegated acts is covered in Title VIII. The proposal for a Regulation contains empowerments for the Commission to adopt delegated acts specifying certain details, requirements and arrangements as set out in the Regulation (Article 121).
Title IX includes the transitional and final provisions, including the obligation for the Commission to produce a report evaluating the impact of the Regulation (Article 122). Transitional measures include a grandfathering clause for crypto-assets issued before the entry into force of this Regulation, with the exception of asset-referenced tokens and e-money tokens, are listed in Article 123. Article 124 amends the directive on the protection of persons who report breaches of Union law (Directive (EU) 2019/193729) by adding this Regulation to it and Article 125 specifies that this amendment must be transposed into national law 12 months after the entry into force of this Regulation. Article 126 indicates that this Regulation shall enter into application 18 months after its entry into force, except for the provisions related to e-money tokens and asset-referenced tokens that shall enter into application on the date of entry into force of this Regulation.
Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law (OJ L 305, 26.11.2019, p. 17).
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